two people discussing liens that expire
ComplianceFinanceApril 19, 2021

Bank loses $100,000 due to failure to file timely continuation statement

By: Michael Weissman, Of Counsel at Levin Ginsburg

With very few exceptions, UCC filings to perfect security interests in UCC-style collateral are effective for five years. They can be renewed but only within a specific period (six months prior to the expiration of the five-year period). But sometimes secured parties that lack the sophisticated electronic tracking or automatic continuation provided by service providers slip up and do not renew on time. Costly errors can, and do, result.

The case facts

In The Four County Bank v. Tidewater Equipment Company, 771 S.E.2d 437 (Ga. App. 2015), The Four County Bank financed the acquisition of two items of forestry equipment by Shepherd Brothers Timber Company. It perfected security interests in each item by filing UCC financing statements in the Wilkinson County Superior Court. More specifically, the bank filed a purchase money financing statement as to a 2003 Tigercat Cutter on June 5, 2003, and a purchase money financing statement as to a 2005 Tigercat Skidder on November 18, 2005.

After that, the plot thickens. On August 30, 2007, Shepherd delivered the Cutter to Tidewater as a trade-in on a new model. Shepherd was given a $52,000 credit for the trade-in. Tidewater sold the trade-in to a third party. On June 26, 2008, Shepherd delivered the Skidder to Tidewater as a trade-in and was granted a $47,000 credit toward the purchase price of new equipment. Again, Tidewater sold the trade-in to a third party. Tidewater did not do a UCC search before accepting the trade-ins. The trade-ins did not have transferable motor vehicle titles. The bank did not receive any proceeds from the sales.

On October 31, 2008, the bank filed a second UCC financing statement for the Cutter and on March 11, 2011, it filed a second financing statement for the Skidder. Shepherd filed for bankruptcy protection on March 16, 2011. In September 2012 the bank sued Tidewater for conversion but lost.

How did the court rule?

The bank first claimed that when Tidewater took possession of the trade-ins the bank had perfected security interests in them. The court disagreed. It cited the provisions of the UCC that made a filed financing statement effective for five years and, further, that if a security interest is not renewed in time, it ceases to be effective and any security interest that was perfected by it becomes unperfected.

The court also cited Section 9-515 of Article 9 of Georgia’s Uniform Commercial Code for the rule that if UCC filing lapses and becomes unperfected, it is deemed never to have been perfected as against a purchaser for value.

It was quite clear that the bank had not filed continuation statements within five years of the time it filed its initial financing statements. That meant that, as a matter of law, its security interests were “…deemed never to have been perfected as against a purchaser of the collateral for value.” Thus, if Tidewater were considered a purchaser of the Cutter and the Skidder for value, the bank’s initial financing statements were deemed never to have been perfected against Tidewater.

The only remaining issue was whether Tidewater would be considered a purchaser for value. The bank said it wasn’t because it could have discovered the bank’s UCC filings at the local superior court office. The court rejected that assertion saying that under Georgia law a person knows a fact when he or she has actual knowledge of it and there was no evidence that Tidewater had actual knowledge of the bank’s UCC filings. The conclusion was that Tidewater was a purchaser for value without notice of the bank’s UCC filings and, therefore, took the trade-ins free of the bank’s security interests. Tidewater was not liable for conversion.

What's the point? 

This case demonstrates the dire consequences that ensue when the timelines for continuing UCC filings are ignored. It is as though the filings never existed as against an unknowing purchaser for value.

Concerned about your lien portfolio? Automatic Continuation can help.

Lien Solutions offers a service for automatic continuations for liens. With automatic continuation, you can be assured liens will be renewed and your interest remains intact throughout the life of the loan. Give one of our experts a call at 1-800-833-5778, option 3 to get started today.

This piece is authored by Michael Weissman, Of Counsel at Levin Ginsburg

Michael L. Weissman is an attorney in Chicago who has served as Executive Vice President and General Counsel of a banking group, as an adjunct professor at a law school, as a FINRA arbitrator, as an educational trainer in the United States and overseas, as chairman of a leading legal educational organization in Illinois, and as an expert witness in commercial lending cases. Weissman is a winner of the 2018 Addis Hull Award of the Illinois Institute for Continuing Legal Education for speaking, writing, and governance. He serves as a consultant to Wolters Kluwer Lien Solutions and The Risk Management Association.